US Dollar Edges Lower on Interest Rate Outlook

Reuters

Wednesday, 18 Jun 2008 | 5:53 PM ETReuters

SHARES

The U.S. dollar edged lower on Wednesday as investors adjusted their interest rate outlooks for the United States and the euro zone after conflicting economic data and monetary authorities toned down threats of tighter policy.

Competing central bank rhetoric was likely to make trading conditions more volatile in the days ahead while declining stock market also helped erode the appeal of the greenback, analysts said.

"The outlook for rates is still uncertain and in the meantime data has not been very supportive, dragging on stocks and on the dollar," said Andrew Busch, global foreign exchange strategist at Bank of Montreal in Chicago.

"All in all, we have yet to see big piles of cash flowing into long dollar positions." Traders scrambled to revise downward their expectations of an August Federal Reserve interest rate rise after data this week showed U.S. housing starts plunged to a 17-year low in May.

At the same time, U.S. wholesale prices shot up, driven by energy costs, but analysts reckon the Fed will not rush to tighten policy in the absence of signs of stability in the housing sector, which threatens to drag the broader economy into a recession.

U.S. short-term interest rate futures are pricing in a roughly 48 percent chance of a 25 basis points Fed rate increase in August, down from 90 percent earlier in the week.

"The major currency pairs, euro/dollar, are taking their cue from fluctuations in expectations for policy tightening both in the U.S. and abroad," said Omer Esiner, currency analyst at Ruesch International in Washington.

In late afternoon trade, the New York Board of Trade's dollar index, which tracks the dollar's performance against a basket of six currencies, was nearly slightly lower at 73.419, after rising as high as 73.774 in overnight trade.

The euro edged higher, or 0.1 percent to $1.5530 after earlier slipping to $1.5462.

It remained confined to a $1.53-1.5550 range in the absence of fresh economic data.

Remarks by San Francisco Federal Reserve Bank President Janet Yellen on Wednesday suggesting the volatility in financial markets was showing signs of easing gave the market little impetus.

The dollar was 0.1 percent lower at 107.80 yen , tracking a fall in U.S. stocks, which were weighed down by a quarterly loss from FedEx Corp.

"Earnings have yet to pick up and as a result it's more difficult to attract flows," said Busch at the Bank of Montreal.

On Tuesday, officials from the Federal Reserve, European Central Bank, and Bank of England tamped down expectations for aggressive interest rate rises to curb inflation pressures.

The U.S. central bank is widely expected to keep its benchmark fed funds rate target at 2.0 percent next week, having cut it by 3.25 basis points since mid-September to fend off a housing-led economic downturn.

"There is no one who believes we are at a neutral policy stance now on behalf of the Fed.

We have extraordinary monetary accommodation which at some point needs to be removed," said Michael Woolfolk, currency strategist at Bank of New York Mellon in New York.

A tightening in monetary policy would help the dollar regain some of its appeal to investors seeking higher returns.

While expectations of a series of rates hikes from the ECB have also been scaled back in recent days, a move to 4.25 percent in July is still widely expected.